If there is one thing management institutes must teach students, it is to read between the lines. For example, the American ?twist operation? indicates the US Fed expecting a long spell of recession. Back home, RBI has got the interest rates to a height and seems poised to start cutting rates several times in future. Does is mean that the central bank is changing its target?
It?s like an aircraft that wants to go into a spin, must first gain adequate altitude so that it doesn?t crash during the subsequent free fall. Probably the RBI Governor wants policy rates to gain adequate height so that later there will be enough room to cut them to stimulate growth, without hitting rock-bottom levels, or getting into a liquidity trap from where there?s nowhere to go. And hence the more rate hikes RBI undertakes, probably the longer and deeper the impending recession it expects.
It?s quite evident from the tables ?A? and ?B? that inflation has not responded to the successive rate hikes from April 2010 for the obvious reason that inflation wasn?t a monetary phenomenon in the first place. It started with supply shortages, especially of primary articles, and spread to the other sectors what with rising oil prices globally. The initial ?baby steps? RBI took to tame inflation kept it behind the curve, which made inflation numbers worse since it raised the cost of funds and thus cost of production and prices further. With good monsoon, moderating global oil prices and RBI intervention to support sliding rupee thereby moderating import prices is bound to bring inflation down anyway even without further rate hikes. Hence the need to look for reasons of the latest rate hike elsewhere.
A second reason for the rate hike could be to keep the real interest rates positive. With high inflation, unless nominal interest rates are above inflation numbers, the real interest is likely to get into the negative territory, which could adversely affect mobilisation of savings and availability of financial resources. In near future when inflation moderates, the rates could be cut to keep the real interest rates low. Thus, the idea either way seems to be to encourage investments and the management student must read between the lines and rush to capture best resources to support expansion plans in immediate future.
A third reason for the rate hike with a view to subsequently soften rates is the fiscal expansion that will need monetary accommodation. The recent clearance of the ambitious $90bn Mumbai-Delhi industrial corridor; clearing R18,000 crore worth of projects, reforms in infrastructure are all soon going to require availability of cheap finances. As the table ?C? indicates, growth rate in India has fallen, although not to alarmingly low levels. But if the trend continues, unemployment will be on the rise and then it will become difficult to arrest the recession. Interest rates go into cycles and hence one could well expect RBI to start cutting rates sooner than later. And, as happened in Turkey, rate cutting is very likely to actually bring inflation down by stimulating growth and not raise it! Rate cuts would raise investment, production and correct the supply-side imbalances. And this is destined to happen through the management practitioner.
In face of double-dip worries and inevitability of the European default freezing financial markets, other central banks around the world have started cutting rates and stimulating their economies. In India fiscal policy appears to have started doing the job, but how long RBI takes to move in tandem and embark on an expansionary mode, only time will tell. Meanwhile, it may be refreshing to think that RBI has given up on inflation targeting either because, given the time lag in monetary policy effect, it has done its bit, or because inflation will moderate soon anyway; or because with anti-inflationary monetary measures failing, RBI is already targeting growth. The management student must learn to grab such opportunities and bottom-fish for best resources and be instrumental in India?s revival story. Management education must give him the foresight and capability to do so.
The author is director, Indus Business School, and guest faculty of economics at Symbiosis and IIPM Pune.
shubhadasabade@hotmail.com